9 Sensitivity Analysis. Scenic Systems designs and manufactures specialist bathroom fittings. The company’s management is considering a proposal to manufacture and market a new shower systems product. The project would require an investment in premises, plant and equipment of £1.5 million.

The marketing manager estimates sales of the new unit at 70,000 per year at a selling price of £26.00 per unit. Relevant cash operating costs are estimated at 75 per cent of sales value. Assuming a cost of capital of 14 per cent and an economic project life of 8 years, you are required to:

(a) Calculate the project’s NPV.

(b) Test the sensitivity of the project’s NPV to changes in:

(i) selling price;

(ii) cost of capital;

(iii) initial investment;

(iv) project life.

(c) Summarise and comment on your findings.